Option Investor

Daily Newsletter, Monday, 9/13/2010

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Stocks Continue To Defy September History

by Todd Shriber

Click here to email Todd Shriber
September 2010 apparently did not get the memo about what a glum month this usually is for stocks as news of the Basel III banking accords helped lift financials on both sides of the Atlantic and further evidence that China's economic growth story remains provided a boost to the broader market. Here in the U.S., technology issues led the way with the Nasdaq gaining almost 2%, the best performance among the major U.S. indexes. By the time the closing bell rang, U.S. stocks settled at a one-month high.

Stats Table

The Basel III banking accords were viewed as a positive by investors as both U.S. and European financials moved to the upside on the news. At the heart of the matter, banks will now have more time (up to 2019) to raise more capital if needed. European Central Bank President Jean-Claude Trichet called the agreements ''a fundamental strengthening of global capital standards'' and that Basel III's ''contribution to long-term financial stability and growth will be substantial.''

The timeframe of over eight years for banks to raise additional capital is probably intended to accommodate the weakest links of the bunch, for example Greek banks. The strongest European and U.S. banks have already shown they do not need that much time to raise fresh capital. Deutsche Bank (DB) is meeting the challenge head-on after announcing a capital raising plan last week and while a Swiss press report said over the weekend that Credit Suisse (CS) and UBS (UBS) may need to raise a combined sum of nearly $20 billion, analysts believe the banks earnings should be sufficient to cover the new capital requirements.

Bottom line: The Basel news was viewed in a positive light as major U.S. banks enjoyed a solid a day. The Financial Select Sector SPDR (XLF) finished the day higher by more than 2%, closing above its 200-day moving average for the first time since early August.

XLF Chart

China chimed in with some strong economic news that aided the rally in U.S. equities. Over the weekend, China said industrial output in August jumped 13.9% in August compared to a 13.4% increase in July. The bullish news out of China did not stop there. Retail sales surged 18.4% on the year and fixed asset investment in China cities came in at a robust 24.8%.

Of course, good news out of China usually means positive price action in the commodities complex and that was the result today. Copper surged 7.25 cents, or 2.1%, to settle at $3.4790 per pound, settling near the intraday high of $3.4935. The red metal is now within striking distance of four-month high of $3.5345, which was set last week.

The most recent London Mercantile Exchange data shows copper stockpiles have been drawn down by 950 tons to 390,450 tons, the lowest level since November and down 150,000 tons since February, according to Reuters.

Copper Chart

Oil was no slouch either, popping 74 cents, or 1%, to close at $77.19 per barrel on the New York Mercantile Exchange. That is good for the highest closing price since August 11. China's economic news certainly helped, as did news of a shutdown of an Enbridge Energy Partners pipeline in the Chicago area. A leak was discovered at that pipeline last Thursday and since the pipeline moves 670,000 barrels per day from Canada to the U.S., near-term supply concerns also helped prop oil up today.

Oil Chart

Speaking of oil, there were a couple of analyst notes out today that said the legal claims BP (BP) is facing from the Gulf of Mexico oil spill may be less than the $20 billion the company set aside in the independent claims fund it formed at the behest of the White House earlier this year. Citigroup said the $32 billion provision BP took to cover spill costs is the most reasonable estimate of the financial obligations BP faces for the largest oil spill in U.S. history.

The Citi note went onto to say BP's fourth-quarter financials may be strong enough to support the company's dividend being reinstated in that quarter. BP previously suspended shareholder dividends to conserve cash. Managing Director Robert Dudley, who will become BP's CEO on October 1, has not been all that encouraging about the dividend, saying in July that the company would not be in a hurry to reinstate the dividend.

Dudley did not indicate that the dividend would be reinstated this year in a recent meeting with analysts. Bernstein analysts said that BP would probably need to complete $30 billion in planned asset sales over the next 18 months before restoring the dividend. ''BP's cashflow position should be just strong enough to support restoration of dividends by the first quarter of 2011, under an $80 barrel price scenario based on estimates,'' Bernstein said.

BP Chart

Speaking of dividends, Microsoft (MSFT) surged by more than 5% on news that the company may sell debt to fund dividends and share repurchases. Mr. Softie is among a dozen tech giants that are sitting on mounds of cash that also are not rewarding their shareholders with any, or in the case of Microsoft, not much of that cash. To be fair, Microsoft does currently pay an annual dividend of 52 cents, good for a paltry yield of 2.2%.

Microsoft has $36.8 billion in cash and short-term investments, so selling debt to fund a higher regular dividend or a special dividend and share buybacks is a curious move, but sources close to the matter say the company is choosing to sell debt because too much of its cash is held overseas, Bloomberg News reported. The debt offering could come as soon as this calendar year, according to Bloomberg.

Whether or not this prompts other tech companies to juice their payouts remains to be seen. Barron's addressed the issue of big tech companies with big wads of cash who aren't sharing that cash with investors. With data from Morgan Keegan, the Barron's piece shows that if Microsoft opted to go big and have a payout ratio of 70%, the shares would yield 7.2%. Even a payout ratio of 40% would result in a respectable 3.9% yield.

Still, Microsoft's current 2.2% yield is better than the 0.8% Hewlett-Packard (HPQ) and Oracle (ORCL) offer and 0.8% is better than what Apple (AAPL), Cisco (CSCO), EMC (EMC) and Google (GOOG) offer because those companies pay no dividends at all despite the fact that they could easily afford to. A payout ratio of 40% would take HP's yield to a solid 4.6%, but HP chooses to spend its money in other ways, a point I will address in momentarily.

For now, the chorus of those calling Microsoft a value play is likely to grow louder. I am not so sure, but the shares did move above the 50-day moving average.

Microsoft Chart

Staying in the tech world, HP continues to be an investment banker's dream. A shakeup at the top of HP that has the company operating under the guidance of an interim CEO who has said she does not want the top job is not enough to deter the computer giant from its acquisitive ways. The latest apple of HP's eye is network security provider ArcSight (ARST), which surged more than 25% on news that HP would buy the company for $1.5 billion.

ArcSight Chart

HP sure is not shy about paying up for its targets. The $2.07 billion price tag for 3Par (PAR) is about 10 times annual revenue and paying $1.5 billion for ArcSight, which posted $181 million in sales in its most recent fiscal year, does no exactly represent a big discount. HP is a tad late to the network security business party, where it will find itself competing directly with rivals like EMC and IBM, but analysts seem to agree that the ArcSight Acquisition makes sense.

Whether or not these deals make financial sense for HP is another matter altogether. At least one analyst voiced this concern on HP's conference call today. Something else to consider with regards to investing in HP: The stock is down more than 10% in the past two years while IBM is up 10% and given that 90% of all acquisitions fail to create shareholder value, it is highly probable that HP is making a mistake or two with all these deals, at least statistically speaking. All this begs the question: Why is HP not using some of its cash to boost its dividend?

Looking at the charts, the S&P 500 took out resistance at its 200-day moving average at 1115 today and with a close just below 1122, the index is in prime position to start dealing with resistance in the 1127-1130 area, also known as the August highs. With today's gain of 1.1%, the S&P 500 is now up 6.8% in September and that includes just one day of negative trade.

S&P 500 Chart

The Dow was able to ease its way above its 200-day moving average at 10,450 on Friday and that put the blue chip index in position to break through resistance at 10,475, a feat that was easily accomplishd today. Basel III helped the financials and the Microsoft dividend news provided a boost as well. The close above 10,475 turns attention to resistance at 10,700. Dow Chart

As I mentioned at the start of the wrap, the Nasdaq was the real juggernaut today, easily taking out resistance at 2270 to move comfortably above the 200-day moving average. Now 2300 becomes the big hurdle, an area the Nasdaq has not closed above since late July. I am not saying it is going to happen soon and I highly doubt it will happen this week, but a Cisco dividend would be a useful catalyst for the Nasdaq.

Nasdaq Chart

Do not forget about the Russell 2000, which turned in an impressive 2.5% run today. I saw a piece over the weekend where a pundit said small caps looked ready to roll over. That thesis may prove true, but it is a difficult bet to make right, especially since the Russell 2000 took out resistance at 650 today. The big event would be a move above 675.

Russell 2000 Chart

This September continues to defy the historical precedent set by this month and any good economic news, Chinese or otherwise, is just going to send the shorts running for cover. Retail sales could get the ball rolling tomorrow and if investors start to pull cash out of bond funds to chase this September rally, the path of least resistance will remain up, at least in the near-term.

New Plays

Volatility Anyone?

by Scott Hawes

Click here to email Scott Hawes


iPath S&P 500 VIX ST Futures - VXX - close 17.58 change -0.96 stop 16.60

Target(s): 19.60, 20.40
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Time Frame: 1 to 3 weeks

Company Description:
The S&P 500 VIX Short-Term Futures Index is designed to provide access to equity market volatility through CBOE Volatility Index (the "VIX Index") futures. Specifically, the S&P 500 VIX Short-Term Futures Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract.

Why We Like it:
The market is overbought and needs a healthy pullback to regain its energy. Traders are getting complacent and I believe there will be a spike in volatility in the coming days. VXX printed a new 52-week low today which barely undercut its 4/21 low which was just before the S&P 500 began to sell-off in earnest. This creates a potential double bottom set-up and I suggest readers initiate long positions at current levels. I also view this as a good hedge against our open long positions in the model portfolio. Our profit targets are +11% and +16% from current levels. NOTE: I view this as an aggressive trade so small position size is recommended. Long VXX is a bearish play on equities, however, it is listed as long play because we are long the underlying instrument.

Suggested Position: Long VXX stock at current levels

Options Traders: Buy October $19.00 CALL, current ask $1.00

Annotated chart:

Entry on September XX
Earnings N/A (unconfirmed)
Average Daily Volume: 21 million
Listed on September 13, 2010

In Play Updates and Reviews

Big Winner Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

The Andersons, Inc - ANDE - close 37.46 change +0.69 stop 34.45

Target(s): 38.95, 39.90, 41.50
Key Support/Resistance Areas: 41.50, 40.50, 39.20, 37.50 to 38.00, 35.50
Current Gain/Loss: +1.19%
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

9/13: ANDE closed right at $37.50 which is where the stock has struggled recently. If price keeps knocking at this level the door should open. Now we need a breakout.

9/11: ANDE gained +1.86% and we are still looking for a breakout. My comments from below remain the same.

9/9: ANDE traded in a tight 60 cent range within yesterday's price range. The stock is consolidating just below its 52-week highs and I like the volume patterns. We need a breakout.

9/8: The smack down at $37.50 in ANDE continued today as the stock closed -3.35% lower. ANDE remains above the key $35.50 support level but we are getting whipsawed as the stock is trading in a high tight $2 wide bull flag. Today's price action has me concerned but the set-up remains in tact and readers may want to consider new positions to take advantage of today's weakness.

Current Position: Long ANDE stock, entry was at $37.02

Options Traders: Buy December $40.00 Calls, current ask $2.10

Entry on August 19, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 180,000
Listed on August 18, 2010

Brocade Communications - BRCD - close 5.97 change +0.09 stop 4.95

Target(s): 6.00, 6.20, 6.50
Key Support/Resistance Areas: 6.60, 6.20, 6.00, 5.75, 5.40, 5.00
Current Gain/Loss: +3.83%
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

9/13: BRCD was under a little pressure early but the stock recovered nicely and closed near its highs of the day. The stock is just below the 200-day SMA and our first target is approaching.

9/11: BRCD traded down to $5.72 and bounced nicely on Friday. We are long the stock at $5.75. It's too bad we missed our initial trigger by 4 cents at $5.46 but I still like the set-up. I've increased the first target to $6.00.

9/9: My comments below remain the same. Let's be patient and look for a quick dip at $5.75. Trend line support on Monday is near $5.60.

9/8: BRCD came within 6 cents today of reaching our trigger to enter long positions. Patience should payoff and I suggest we leave our trigger at $5.75. I'm looking for BRCD to consolidate some the recent gains and make another leg higher.

Current Position: Long BRCD stock, entry was at $5.75

Options Traders: Long October $6 CALL

Entry on September 10, 2010
Earnings 11/23/10 (unconfirmed)
Average Daily Volume: 12.7 million
Listed on September 4, 2010

Coeur d'Alene Mines - CDE - close 17.74 change -0.09 stop 16.45

Target(s): 18.40, 18.95, 19.95
Key Support/Resistance Areas: 20.00, 19.00, 17.80, 16.70
Current Gain/Loss: -0.89%
Time Frame: 1 to 3 weeks
New Positions: Yes, preferably on pullbacks

9/13: CDE remains in a bull flag on its daily chart. If this breaks out higher prior to a pullback I suggest readers take profits or tighten stops to protect them.

9/11: I've tightened the stop to $16.45 and adjusted the first target down 5 cents. My comments from below remain the same.

9/9: My comments from below remain mostly the same. I am looking for the stock to move up towards its May highs but if the broader market doesn't follow through we may get a pullback first. Readers may want to use a tighter stop in the $16.40 area.

Current Position: Long CDE stock, entry was at $17.90

Entry on September 7, 2010
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 2.0 million
Listed on September 1, 2010

Noble Corp - NE - close 35.19 change +0.33 stop 32.25

Target(s): 36.85, 38.30
Key Support/Resistance Areas: 36.95, 38.50, 33.50
Time Frame: 1 to 3 weeks

9/13: We are waiting to be triggered at $34.60. My comments from the play release below have not changed.

9/11: Fundamentally NE is a cheap stock that trades at a PE under 7. Technically, the stock broke out of a downtrend line that began on 4/27. Volume has been picking up as the stock is moving higher and it is also consolidating near its highs on lighter volume, which is a bullish sign. I suggest we use a trigger of $34.60 to open long positions. Our two targets are +6.5% and +10.5% higher. Our initial stop will $32.25 which is below the rising 20-day and 50-day SMA's.

Suggested Position: Long NE stock if it trades to $34.60

Options Traders: Buy October $36.00 CALL, current ask $1.01

Entry on September XX
Earnings 10/20/10 (unconfirmed)
Average Daily Volume: 3.7 million
Listed on September 11, 2010

Northern Oil & Gas - NOG - close 15.22 change +0.11 stop 14.25

Target(s): 16.00, 16.50
Key Support/Resistance Areas: 17.25, 16.20, 15.75, 15.00, 14.60
Time Frame: 1 to 3 weeks

9/13: Nothing has changed with our long set-up or my comments below. I anticipate getting triggered within the next day or two.

9/11: NOG came with 1 penny of our trigger. I see lots of support below with an upward trend line, moving averages and prior support/resistance areas. I anticipate getting filled on Monday. My comments below remain the same.

9/9: NOG came with 5 cents of hitting our trigger to enter long positions. I suggest we be patient and should get triggered tomorrow or Monday on a quick broader market pullback. More nimble traders may want to time an entry in the $14.75 to $14.90 area.

9/8: Oil and oil stocks should do well on the slightest prospects of an economic recovery. NOG is a land based driller with major assets in the Bakken region in North Dakota, which is one of the largest discoveries of proven oil reserves ever found in the United States. NOG is forming a bull flag on its daily chart and looks poised to breakout. The stock is consolidating above all of its major moving averages which should also help to provide support on any pullbacks. I suggest readers use a trigger $15.05 to initiate long positions. Our two targets are +6% and +9% higher. Our stop is below all of the moving averages and the recent upward trend line.

Suggested Position: Long NOG stock if it trades to $15.05

Options Traders: Buy October $15.00 CALL, current ask $1.05

Entry on September XX
Earnings 10/25/10 (unconfirmed)
Average Daily Volume: 506,000
Listed on September 8, 2010

Power-One, Inc - PWER - close 11.52 change +0.39 stop 9.68

Target(s): 11.60, 12.00, 12.50
Key Support/Resistance Areas: 13.00, 11.75, 50-day, 9.50
Time Frame: 1 to 3 weeks

9/13: I suggest we remain patient and wait for our trigger at $10.80 which is just above the 20 and 50-day SMA's. A pullback in the broader market should get us there.

9/11: Well, PWER came within 1 penny of triggering our long entry so I'm going to raise the trigger to $10.80. Either someone doesn't want to let us in long positions or I am good at picking intraday support levels. Maybe both but we should get filled in the next day or two. There is lots of support below that I think will hold (see below comments).

9/8 & 9/9: We are waiting to be triggered on PWER. Our trigger to enter long positions is $10.75. The stock has several upward trend lines, the 20-day SMA, and rising 50-day SMA as support below and I want to give us the best chance at getting filled.

9/7: Take a look at the grey volume bars on the chart below. It is clear PWER is being accumulated with institutional money as the price has risen over the past 18 months. I like PWER's business and believe this stock will continue to get bought if the market cooperates. I suggest readers use a trigger of $10.75 to enter long positions and target a move back towards the stock's recent high. This is above the stock's upward trend line and the 50-day SMA. Our initial stop will be below both of these at $9.68.

Suggested Position: Long PWER stock if it trades to $10.80

Options Traders: Buy October $11.00 CALL, current ask $1.05

Entry on September XX
Earnings 10/21/10 (unconfirmed)
Average Daily Volume: 5.3 million
Listed on September 7, 2010

Ultrashort MSCI Europe - EPV - close 17.95 change -0.73 stop 17.78

Target(s): 19.40 (hit), 19.75, 20.20
Key Support/Resistance Areas: 18.00, 19.40, 20.25, 20.60
Current Gain/Loss: -5.34%
Time Frame: 1 week
New Positions: Yes, aggressive traders only

NOTE: This is an double inverse ETF and a bearish play on European equities. Expect volatility and use small position size to manage risk.

9/13: We are very close to getting stopped out of EPV. Any strength in European equities tomorrow will most likely take us out. If EPV gaps open near our stop tomorrow I suggest readers place a new stop below the first 15 or 30 minute opening range. This will allow you to measure the true weakness in the stock and often times keeps you in the position looking for a better exit.

9/11: EPV is good hedge against our long positions right now. If global equities turn lower our targets should relatively quick. new positions can be considered now.

9/9: Germany's Deutsche Bank announced today they may need to raise money to meet regulatory capital requirements. This caused EPV to recover early losses and may cause some weakness in European equities tomorrow (good for our inverse ETF). Our $19.40 target was hit on Tuesday. I suggest we take profits or tighten stops to protect them as our targets approach again.

9/8: EPV gave back some of the gains from yesterday as European equities recovered from early losses due to a favorable bond auction in Portugal. If there is weakness in Europe tomorrow or Friday our more aggressive targets could get hit fairly quick. $19.40 is also still a valid target and I suggest readers take profits or tighten stops as targets approach.

9/7: EPV gained +4% today due to the weakness in European equities. Our first target has been hit. I've adjusted the next two targets and suggest readers take profits or tighten stops as they approach.

Current Position: Long EPV stock, entry was at $18.90

Entry on September, 3, 2010
Earnings N/A
Average Daily Volume: 259,000
Listed on August 31, 2010

BEARISH Play Updates

Intuit, Inc. - INTU - close 44.08 change +0.61 stop 45.32

Target(s): 42.00, 41.40, 40.50
Key Support/Resistance Areas: 45.00, 42.00, 41.35, 50-day SMA
Current Gain/Loss: -1.73%
Time Frame: 1 to 2 weeks
New Positions: Yes

9/13: INTU closed its gap down on Friday. I'm looking for the stock to turn lower now. My comments from below have not changed.

9/11: We got a little unlucky with the gap lower in INTU on Friday but it was expected on the heels of a downgrade. Nonetheless, I'm looking for the stock to continue lower. The broader market will most likely determine how far this goes. Our first two targets are -3% and -4.5% lower from here. The play write-up is below.

9/9: UBS cut its rating on INTU from neutral to buy this afternoon, which is when the selling in the stock began in earnest. In addition, price targets from other analysts are in the $45 range which INTU printed on Tuesday. The stock also printed all-time highs on Tuesday but is showing signs of an imminent decline, especially if the broader market pulls back. Tuesday's candlestick is a reversal pattern and it was confirmed today with a bearish engulfing candlestick. I suggest readers initiate short positions at current levels and play for a pullback to our targets which are near three support/resistance levels. Our stop will be just over Tuesday's high. Our targets are -4.5% to -8% below current levels. I also think this is a good play to consider options which creates defined risk. For example, buying 4 contracts of the October $42.50 strike for 90 cents (mid point of the current bid/ask spread) will cost you $360.00. Should INTU stock move -$1.50 lower over the next 1 to 2 weeks those options should be worth about $1.40. This would represent a +55% gain (or a $200 return on your $360 at risk). I bring this up due to all of the M&A activity and I would rather see readers protect against a large gap if INTU happens to be a takeover target, although I haven't heard anything to substantiate this. Simply put, the stock looks ready for a pullback. Please email me with any questions.

Current Position: Short INTU stock, entry was at $43.33

Option Traders: Buy October $42.50 PUTS

Entry on September, 10, 2010
Earnings: 11/18/2010 (unconfirmed)
Average Daily Volume: 4 million
Listed on September 9, 2010


Rackspace Hosting, Inc - RAX - close 22.48 change +0.74 stop 21.14 *NEW*

Target(s): 21.85 (hit), 22.30 (hit), 22.65 (hit)
Key Support/Resistance Areas: 23.50, 21.40, 20.00, 19.50, 19.00, 18.00
Final Gain/Loss: +15.27%
Time Frame: 3 to 5 weeks
New Positions: Closed

9/13: RAX surged higher again today and our final targets were hit. We are flat the position for +100% gain. I'll reprint this comment from below: One of the reasons I released this play was takeover chatter circulating in the sector and around the company. We all saw what happened with 3Par. Hanging on to a small position could pay off but take profits off the table so you are at least playing with the houses money, per se.

9/11: RAX broke out of the ascending triangle I mentioned below and gained +3.5% today. The stock has gained more than +10% from our entry and our options have gained +60%. Taking at least some profits off of the table is the smart thing to do. It wouldn't surprise me to see RAX pull back to the $21.35 area before a continuation higher if the broader market strength continues this week. Regardless we are going to keep a tight leash on this trade and move the stop all the way up 21.14. I would also watch out for a possible double top with Friday's high at 21.86 so I have lowered the next target 10 cents to 21.85 and the final target is 22.30. Essentially, we are looking to book gains on this position n the coming days. One of the reasons I released this play was takeover chatter circulating in the sector and around the company. We all saw what happened with 3Par. Hanging on to a small position could pay off but take profits off the table so you are at least playing with the houses money, per se.

9/9: We currently have a +30% gain in RAX. Let's move our stop up to $18.95 which is just below the 200-day SMA and primary upward trend line. The stock is forming an ascending triangle over the past couple of weeks and a breakout, coupled with broader market strength, could catapult RAX to our more aggressive targets. If this happens be ready to take profits or tighten stops to protect them.

Closed Position: Long RAX stock at $22.65, entry was at $19.65

Annotated chart:

Entry on August 25, 2010
Earnings 11/9/2010 (unconfirmed)
Average Daily Volume: 1.75 million
Listed on August 25, 2010